Case:

Karl was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. Karl’s passion was real estate and he was very successful in his investments.

Karl continued to buy and sell real estate at the age of 85. His latest venture led him to a great investment property. It was a “fixer-upper” commercial building in a great area. While other nearby buildings sold for over $2 million, the seller needed to sell quickly and was asking just $1 million.

The condition of the building turned many buyers away. It was being sold as-is, but Karl was not deterred. He could see great potential with the building and knew it would not take much to get it to market condition. Therefore, Karl swooped in, bought the building for $1 million and instantly hired contractors to refurbish the place.

After three months of hard work refurbishing the building, the place looked like new. In the end, Karl invested $250,000 in the building bringing his total investment in the property to $1.25 million. One month after the completion of the work, Karl was contacted informally by a company that expressed an interest in the building – a $2 million interest. This was no surprise to Karl. He knew the building was another great buy.

After Karl learned about the benefits of a FLIP CRUT, he eagerly wanted to move forward. (See Parts 1 and 2 for a full discussion of this decision.) It looked like the perfect solution. However, Karl did still have some important questions.

Question:

Karl wanted to know what steps are needed in order to substantiate his charitable income tax deduction? He knew the IRS would not just “take his word for it.”

Solution:

This is a very important question as it is crucial that Karl follows the valuation and substantiation rules closely. In fact, taxpayers may lose their charitable income tax deductions if the required forms are not properly filed. Because Karl is making a gift of property (i.e., the building and land), he must file IRS Form 8283.

The basic rule states that if a donor makes a noncash charitable contribution greater than $500, Form 8283 must be included with his or her income tax return. Karl’s property gift will surpass the $500 threshold, so he must file Form 8283.

The first section of Form 8283, Part A, must include a description of the property. For tangible personal property, this description should include the general condition of the property. In addition to the description, any restrictions or reservations of income, voting rights, acquisition rights or limits on use, must be disclosed. For example, all charitable remainder trust interests must be disclosed. One method for disclosure is to append the deduction calculation to Form 8283.

For gifts of property over $5,000 in value ($10,000 for closely held stock), Part B of Form 8283 must also be completed. Part B is essentially an appraisal summary. Again, Karl’s property gift also exceeds the $5,000 mark, so he must complete Part B as well. There is an exception to this rule, however, for publicly traded securities.

In particular, Part B requires that both the appraiser and the charitable donee sign and date Form 8283. With a charitable remainder unitrust or annuity trust, there may not be a particular vested charitable donee as remainder recipient. Therefore, for all unitrusts or annuity trusts, the CRT trustee signs as the charitable donee on Part B of Form 8283. In this instance, Karl is making a gift to a FLIP CRUT. Thus, it is sufficient if the trustee of the FLIP CRUT signs Part B of Form 8283.

The signature of the charitable donee or CRT trustee is a mere acknowledgement on the receipt of the property. As such, the charitable donee or CRT trustee is making no statement as to the proper value of the donated property. In addition, Karl must provide a copy of Form 8283 to the charitable donee or, in this case, the CRT trustee. Finally, if the deduction is over $500,000, Karl must attach both Form 8283 and the appraisal to his IRS 1040 tax return.

Editor’s Note: In Part 11 of this case study series, we addressed the appraisal rules and qualifications for an appraiser.